Tag Archives: Dave Ramsey

The Narrow Road of Financial Success

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Financial success, whether in personal finance or investing, is usually found by going against the norm.

The Wide Road

In a fast-paced get it now society credit is a way of life, but that is not the narrow road.

Leveraged to the max and living payday to payday is the standard, but that is not the narrow road.

Not having enough to save for that disaster when it happens is just a fact of life, but that is not the narrow road.

Depending on others for our well-being and future makes it easier to spend our income now, but that is not the narrow road.

The Narrow Road

Delay gratification, save for what you desire and avoid credit at every turn.

Pay off those bills;have money left at the end of the month and start to live stress free.

Disaster will happen. With a fully funded emergency fund those disasters can become mere inconveniences.

By thinking past today and taking responsibility for the future, a comfortable retirement can become a reality.

It is Easy to Get Lost

There is no magic formula or get rich scheme out there. It takes sacrifice, willpower and a desire to achieve ‘financial freedom’. But beware, the narrow road is not easy to find and even harder to follow.

My suggestion: Get a guide or a navigator.

Accountability to someone else, perhaps a spouse or close friend, can keep the narrow road under your feet and trouble behind you. In fact, this blog is part of my financial accountability.

“It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.” - Ralph Waldo Emerson

Household Inc.

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The process of finding an investment worthy company starts with screening for sound fundamentals. A strong company that knows how to manage cash inflows, outflows, and debt can set itself up to survive  an economic downturn and is a good candidate for investment.

What if I told you your household was a business; how would it stand up to our stock screen?

Household Inc. vs. the BWB 7 Screen

1. Adequate Size
The Annual Revenue of Household Inc. is how much income the household generates a year. The Millionaire Next Door tells us that the median taxable income of millionaire households is around $131,000.00 Maybe your company is not there yet, but it is something to strive for. Remember though, it’s not all about how much you make; it’s about what you do with it.

2. A Sufficiently Strong Financial Condition
Simply put, current ratio is current assets divided by current liabilities. When screening companies I look for a current ratio greater than 2. Taking a close look at your household’s current ratio can be revealing. Unfortunately, many people may only look at this ratio when they are applying for a loan and getting ready to increase household liabilities.

3. Earnings Stability
Earnings Per Share is the money left for shareholders after all the expenses of running the business are taken care of. Household Inc. may be in trouble if as Dave Ramsey says, “There’s too much month at the end of the money”.

4. Dividend Record
Dividends are payments returned to shareholders out of surplus cash. I like to see this payment if a company has no better use for the cash (like reducing debt or increasing meaningful assets). The dividend for Household Inc. may be the amount of savings the company is able to invest or put away after all the monthly fixed costs are met.

5. Earnings Growth
As Revenues increase, fixed costs and liabilities decrease, earnings should increase. Over time this growth should be steady and consistent as debt is paid off and costs for the household are trimmed.

6. Moderate Price to Earnings Ratio
Debt to income ratio for this application. The lower the better… Here is a calculator.

7. Moderate Ratio of Price to Assets
This may be another look at debt versus assets. How does Household Inc. stack up?

Summary

A successful company (and household) will over time increase revenues, keep operating cost low and eliminate debt.

The screen looks multiple times at the debt a household may have on the books. There is a reason for this: debt is dangerous. It erodes earnings and subsequent savings. This not only jeopardizes the here and now, but the future of all inhabitants of the household.

As the CEO of Household Inc. it is your responsibility to lead your company to success. Start with sound fundamentals and you will be making the best investment of your life.